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EX-10.2 - EXHIBIT 10.2 - CSI Compressco LPa20150630ex102cclp.htm
EX-31.2 - EXHIBIT 31.2 - CSI Compressco LPa20150630ex312cclp.htm
EX-32.1 - EXHIBIT 32.1 - CSI Compressco LPa20150630ex321cclp.htm
EX-32.2 - EXHIBIT 32.2 - CSI Compressco LPa20150630ex322cclp.htm
EX-31.1 - EXHIBIT 31.1 - CSI Compressco LPa20150630ex311cclp.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 

 
FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM _____ TO______
 
COMMISSION FILE NUMBER 001-35195
 
 
CSI Compressco LP
(Exact name of registrant as specified in its charter)

 
Delaware 
94-3450907
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
3809 S. FM 1788
 
Midland, Texas
79706
(Address of principal executive offices)
(zip code)
 
(432) 563-1170
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No [   ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ]  No [   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [  
Accelerated filer [   ] 
Non-accelerated filer [X] (Do not check if a smaller reporting company)
Smaller reporting company [   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]  No [ X ]
As of August 7, 2015, there were 33,183,294 Common Units outstanding.




CERTAIN REFERENCES IN THIS QUARTERLY REPORT
 
References in this Quarterly Report to “CSI Compressco,” “we,” “our,” “us,” “the Partnership” or like terms refer to CSI Compressco LP (formerly named Compressco Partners, L.P.) and its wholly owned subsidiaries. References to “CSI Compressco GP” or “our General Partner” refer to our general partner, CSI Compressco GP Inc. References to “TETRA” refer to TETRA Technologies, Inc. and TETRA’s controlled subsidiaries, other than us.





PART I
FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
CSI Compressco LP
Consolidated Statements of Operations
(In Thousands, Except Unit and Per Unit Amounts)
(Unaudited)

Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:


 


 
 

 
 

Compression and related services
72,826

 
30,043

 
148,114

 
57,970

Aftermarket services
4,671

 

 
14,121

 

Equipment and parts sales
48,968

 
2,065

 
67,119

 
3,948

Total revenues
126,465

 
32,108

 
229,354

 
61,918

Cost of revenues (excluding depreciation and amortization expense):


 


 
 

 


Cost of compression and related services
37,490

 
16,227

 
74,468

 
31,381

Cost of aftermarket services
4,195

 

 
12,367

 

Cost of equipment and parts sales
43,000

 
1,066

 
57,957

 
1,995

Total cost of revenues
84,685

 
17,293

 
144,792

 
33,376

Selling, general, and administrative expense
10,554

 
5,008

 
21,803

 
9,102

Depreciation and amortization
20,629

 
3,751

 
40,617

 
7,433

Interest expense, net
7,961

 
145

 
15,867

 
304

Other expense, net
1,170

 
498

 
2,409

 
1,037

Income before income tax provision
1,466

 
5,413

 
3,866

 
10,666

Provision for income taxes
303

 
534

 
895

 
1,168

Net income
$
1,163

 
$
4,879

 
$
2,971

 
$
9,498

General partner interest in net income
$
379

 
$
98

 
$
719

 
$
190

Common units interest in net income
$
784

 
$
2,853

 
$
2,252

 
$
5,554

Subordinated units interest in net income
$

 
$
1,928

 
$

 
$
3,754

 


 
 

 
 

 


Net income per common unit:
 
 
 
 
 
 
 
Basic
$
0.02

 
$
0.31

 
$
0.07

 
$
0.60

Diluted
$
0.02

 
$
0.30

 
$
0.07

 
$
0.59

Weighted average common units outstanding:


 


 


 
 

Basic
33,161,286

 
9,284,500

 
33,153,039

 
9,280,242

Diluted
33,161,286

 
9,370,041

 
33,153,039

 
9,343,188

Net income per subordinated unit:


 


 


 


Basic and diluted
$

 
$
0.31

 
$

 
$
0.60

Weighted average subordinated units outstanding:


 


 


 


Basic and diluted

 
6,273,970

 

 
6,273,970



See Notes to Consolidated Financial Statements

1



CSI Compressco LP
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
1,163

 
$
4,879

 
$
2,971

 
$
9,498

Foreign currency translation adjustment
(1,853
)
 
77

 
(1,677
)
 
(2,891
)
Comprehensive income (loss)
$
(690
)
 
$
4,956

 
$
1,294

 
$
6,607

 

See Notes to Consolidated Financial Statements

2



CSI Compressco LP
Consolidated Balance Sheets
(In Thousands, Except Unit Amounts)
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
33,279

 
$
34,066

Trade accounts receivable, net of allowances for doubtful accounts of $1,592 in 2015 and $1,496 in 2014
54,872

 
78,741

Inventories
113,528

 
113,343

Deferred tax asset
182

 
124

Prepaid expenses and other current assets
6,628

 
5,516

Total current assets
208,489

 
231,790

Property, plant, and equipment:
 

 
 

Land and building
34,947

 
34,312

Compressors and equipment
812,208

 
756,113

Vehicles
14,069

 
15,915

Construction in progress
241

 
298

Total property, plant, and equipment
861,465

 
806,638

Less accumulated depreciation
(155,894
)
 
(120,642
)
Net property, plant, and equipment
705,571

 
685,996

Other assets:
 

 
 

Goodwill
233,386

 
233,548

Deferred tax asset
1,416

 
1,464

Intangible assets, net of accumulated amortization of $9,697 as of June 30, 2015 and $3,826 as of December 31, 2014
58,972

 
62,974

Deferred financing costs and other assets
15,565

 
16,689

Total other assets
309,339

 
314,675

Total assets
$
1,223,399

 
$
1,232,461

LIABILITIES AND PARTNERS' CAPITAL
 

 


Current liabilities:
 

 


Accounts payable
$
29,698

 
$
37,815

Unearned income
54,684

 
65,778

Accrued liabilities and other
31,557

 
29,178

Amounts payable to affiliates
7,351

 
6,480

Deferred tax liabilities
1,481

 
1,117

Total current liabilities
124,771

 
140,368

Other liabilities:
 

 
 

Long-term debt, net
578,212

 
539,961

Deferred tax liabilities
956

 
1,788

Other long-term liabilities
396

 
63

Total other liabilities
579,564

 
541,812

Commitments and contingencies
 

 
 

Partners' capital:
 

 
 

General partner interest
10,881

 
11,341

Common units (33,183,294 units issued and outstanding at June 30, 2015 and 33,142,114 units issued and outstanding at December 31, 2014)
513,196

 
542,276

Accumulated other comprehensive income (loss)
(5,013
)
 
(3,336
)
Total partners' capital
519,064

 
550,281

Total liabilities and partners' capital
$
1,223,399

 
$
1,232,461

 
See Notes to Consolidated Financial Statements

3




CSI Compressco LP
Consolidated Statement of Partners’ Capital
(In Thousands)
(Unaudited)
 
 
Partners' Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Total Partners' Capital
 
 
 
 
General
Partner
 
Common
Unitholders
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
11,341

 
$
542,276

 
$
(3,336
)
 
$
550,281

Net income
719

 
2,252

 

 
2,971

Distributions ($0.98 per unit)
(1,179
)
 
(32,536
)
 

 
(33,715
)
Equity compensation

 
1,204

 

 
1,204

Other comprehensive income (loss)

 

 
(1,677
)
 
(1,677
)
Balance at June 30, 2015
$
10,881

 
$
513,196

 
$
(5,013
)
 
$
519,064

 

See Notes to Consolidated Financial Statements

4



CSI Compressco LP
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
2015
 
2014
Operating activities:
 

 
 

Net income
$
2,971

 
$
9,498

Reconciliation of net income to cash provided by operating activities:
 

 
 

Depreciation and amortization
40,617

 
7,433

Provision (benefit) for deferred income taxes
(433
)
 
(141
)
Equity compensation expense
1,204

 
437

Provision for doubtful accounts
98

 
212

Other non-cash charges and credits
1,710

 
153

(Gain) Loss on sale of property, plant, and equipment
(104
)
 
266

Changes in operating assets and liabilities:
 

 
 
Accounts receivable
22,161

 
2,765

Inventories
(185
)
 
(1,434
)
Prepaid expenses and other current assets
(801
)
 
5

Accounts payable and accrued expenses
(14,758
)
 
2,043

Other
(278
)
 
(281
)
Net cash provided by operating activities
52,202

 
20,956

Investing activities:
 

 
 
Purchases of property, plant, and equipment, net
(57,092
)
 
(10,882
)
Advances and other investing activities
(64
)
 
(1,405
)
Net cash used in investing activities
(57,156
)
 
(12,287
)
Financing activities:
 

 
 
Proceeds from long-term debt
38,153

 
7,348

Distributions
(33,715
)
 
(14,258
)
Net cash provided by (used in) financing activities
4,438

 
(6,910
)
Effect of exchange rate changes on cash
(271
)
 
(396
)
Increase (decrease) in cash and cash equivalents
(787
)
 
1,363

Cash and cash equivalents at beginning of period
34,066

 
9,477

Cash and cash equivalents at end of period
$
33,279

 
$
10,840

Supplemental cash flow information:
 

 


Interest paid
$
17,346

 
$

Income taxes paid
$
1,748

 
$
997



See Notes to Consolidated Financial Statements

5



CSI Compressco LP
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE A BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
We are a provider of compression services and equipment for natural gas and oil production, gathering, transportation, processing, and storage. We also sell standard and custom-designed compressor packages and oilfield fluid pump systems, and provide aftermarket services and compressor package parts and components manufactured by third-party suppliers. We provide these compression services and equipment to a broad base of natural gas and oil exploration and production, midstream, and transmission companies operating throughout many of the onshore producing regions of the United States as well as in a number of foreign countries, including Mexico, Canada, and Argentina. We design and fabricate a majority of our compressor packages and use these compressor packages in conjunction with other equipment and personnel from affiliated companies to provide services to our customers.
Presentation
 
Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of June 30, 2015, and for the three and six month periods ended June 30, 2015 and 2014, include all normal recurring adjustments that are necessary to provide a fair statement of our results for the interim periods. Operating results for the period ended June 30, 2015 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2015.

Results of operations for the three and six month periods ended June 30, 2015, reflect the impact of our acquisition of Compressor Systems, Inc. ("CSI"), a Delaware corporation, on August 4 2014. For further discussion of the acquisition, see Note B - Acquisition.

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission ("SEC") and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in connection with the financial statements for the year ended December 31, 2014, and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 19, 2015.

Certain previously reported financial information has been reclassified to conform to the current year period’s presentation. The impact of such reclassifications was not significant to the prior year period’s overall presentation. These reclassifications include the final allocation of the purchase price of CSI. See Note B - Acquisitions for further discussion.

Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For further discussion of fair value measurements in connection with the allocation of the purchase price of the CSI acquisition, see Note B - Acquisition. Actual results could differ from those estimates, and such differences could be material.
 
Cash Equivalents
 
We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents.
 
Foreign Currencies
 
We have designated the Canadian dollar and Argentine peso as the functional currencies for our operations in Canada and Argentina, respectively. We are exposed to fluctuations between the U.S. dollar and certain foreign

6



currencies, including the Canadian dollar, the Mexican peso, and the Argentine peso, as a result of our international operations. Foreign currency exchange gains and (losses) are included in Other Expense and totaled $1.2 million and $1.7 million during the three and six month periods ended June 30, 2015, respectively, and $0.0 million and $(0.7) million during the three and six month periods ended June 30, 2014, respectively.

Inventories
 
Inventories consist primarily of compressor package parts and supplies and work in progress and are stated at the lower of cost or market value. For parts and supplies, cost is determined using the weighted average cost method. The cost of work in progress is determined using the specific identification method. Significant components of inventories as of June 30, 2015, and December 31, 2014, are as follows: 

 
June 30, 2015
 
December 31, 2014
 
(In Thousands)
Parts and supplies
43,884

 
43,202

Work in progress
69,644

 
70,141

Total inventories
$
113,528

 
$
113,343

 
Work in progress inventories consist primarily of new compressor units located at our fabrication facility in Midland, Texas.

Compression and Related Services Revenues and Costs

Our compression and related services revenues include revenues from our U.S. corporate subsidiaries' operating lease agreements with customers. For the three and six month periods ended June 30, 2015 and 2014, the following operating lease revenues and associated costs were included in compression and related service revenues and cost of compression and related services, respectively, in the accompanying consolidated statements of operations.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Rental revenue
$
36,187

 
$
2,778

 
$
81,886

 
$
5,610

Cost of rental revenue
$
22,664

 
$
1,843

 
$
44,110

 
$
3,625


Earnings Per Common and Subordinated Unit
 
The computations of earnings per common and subordinated unit are based on the weighted average number of common and subordinated units, respectively, outstanding during the applicable period. Our subordinated units met the definition of a participating security, and, therefore, we are required to use the two-class method in the computation of earnings per unit. Effective August 18, 2014, all of our 6,273,970 subordinated units were automatically converted into common units on a one-for-one basis. Basic earnings per common and subordinated unit are determined by dividing net income (loss) allocated to the common units and subordinated units, respectively, after deducting the amount allocated to our General Partner (including any distributions to our General Partner on its incentive distribution rights), by the weighted average number of outstanding common and subordinated units, respectively, during the period.
 
When computing earnings per common and subordinated unit under the two-class method when distributions are greater than earnings, the amount of the distribution is deducted from net income and allocated to our General Partner (including incentive distribution rights, if any) for the period to which the calculation relates. The excess of distributions over earnings is allocated between the General Partner, common, and subordinated units based on how our partnership agreement allocates net losses.
 
When earnings are greater than distributions, we determine cash distributions based on available cash and determine the actual incentive distributions allocable to our General Partner based on actual distributions. When

7



computing earnings per common and subordinated unit, the amount of the assumed incentive distribution rights, if any, is deducted from net income and allocated to our General Partner for the period to which the calculation relates. The remaining amount of net income, after deducting the assumed incentive distribution rights, is allocated between the General Partner, common and subordinated units based on how our Partnership Agreement allocates net earnings.

The following is a reconciliation of the weighted average number of common and subordinated units outstanding to the number of common and subordinated units used in the computations of net income (loss) per common and subordinated unit. 
 
Three Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2015
 
Common
Units
 
Subordinated
Units
 
Common
Units
 
Subordinated
Units
Number of weighted average units outstanding
33,161,286

 

 
33,153,039

 

Restricted units outstanding

 

 

 

Average diluted units outstanding
33,161,286

 

 
33,153,039

 

 
 
Three Months Ended 
 June 30, 2014
 
Six Months Ended 
 June 30, 2014
 
Common
Units
 
Subordinated
Units
 
Common
Units
 
Subordinated
Units
Number of weighted average units outstanding
9,284,500

 
6,273,970

 
9,280,242

 
6,273,970

Restricted units outstanding
85,541

 

 
62,946

 

Average diluted units outstanding
9,370,041

 
6,273,970

 
9,343,188

 
6,273,970


For the three and six month periods ended June 30, 2015, the average diluted units outstanding excludes the impact of all of the outstanding restricted unit awards, as the inclusion of these units would have been antidilutive.

Accumulated Other Comprehensive Income
 
Certain of our international operations maintain their accounting records in the local currencies that are their functional currencies. For these operations, the functional currency financial statements are converted to United States dollar equivalents, with the effect of the foreign currency translation adjustment reflected as a component of accumulated other comprehensive income. Accumulated other comprehensive income is included in partners’ capital in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with such international operations. Activity within accumulated other comprehensive income during the three and six month periods ended June 30, 2015 and 2014, is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Balance, beginning of period
$
(3,160
)
 
$
(2,555
)
 
$
(3,336
)
 
$
413

Foreign currency translation adjustment
(1,853
)
 
77

 
(1,677
)
 
(2,891
)
Balance, end of period
$
(5,013
)
 
$
(2,478
)
 
$
(5,013
)
 
$
(2,478
)

Activity within accumulated other comprehensive income includes no reclassifications to net income.

Allocation of Net Income (Loss)
 
Our net income (loss) is allocated to partners’ capital accounts in accordance with the provisions of our partnership agreement.


8



Distributions
 
On January 20, 2015, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended December 31, 2014 of $0.485 per unit. This distribution equates to a distribution of $1.94 per outstanding unit on an annualized basis. This cash distribution was paid on February 13, 2015, to all unitholders of record as of the close of business on January 31, 2015.
    
On April 21, 2015, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2015 of $0.495 per unit. This distribution equates to a distribution of $1.98 per outstanding unit on an annualized basis. This cash distribution was paid on May 15, 2015 to all unitholders of record as of the close of business on May 1, 2015.

On July 20, 2015 , the board of directors of our General Partner declared a cash distribution attributable to the quarter June 30, 2015 of $0.500 per unit. This distribution equates to a distribution of $2.00 per outstanding unit on an annualized basis. This cash distribution is to be paid on August 14, 2015 to all unitholders of record as of the close of business on July 31, 2015.
 
Fair Value Measurements

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.

Under generally accepted accounting principles, the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill (a level 3 fair value measurement). Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets, including goodwill (a level 3 fair value measurement). The fair value of our financial instruments, which may include cash, accounts receivable, short-term borrowings, and variable-rate long-term debt pursuant to our bank credit agreement, approximate their carrying amounts. The fair values of our long-term 7.25% Senior Notes at June 30, 2015 and December 31, 2014, were approximately $336.9 million (a level 2 fair value measurement) and $354.9 million, respectively, compared to an aggregate principal amount of $350.0 million, as current rates on those dates were different from the stated interest rates on the 7.25% Senior Notes. We calculate the fair value of our 7.25% Senior Notes as of December 31, 2014 internally, using current market conditions and average cost of debt (a level 2 fair value measurement).
We also utilize fair value measurements on a recurring basis in the accounting for our foreign currency forward purchase and sale derivative contracts. For these fair value measurements, we utilize the quoted value as determined by our counterparty financial institution (a level 2 fair value measurement). A summary of these fair value measurements as of June 30, 2015 is as follows:


9



 
 
 
 
Fair Value Measurements Using
Description
 
Total as of
June 30, 2015
 
Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
(In Thousands)
Asset for foreign currency derivative contracts
 
$
44

 
$

 
$
44

 
$

 
 
$
44

 
 
 
 
 
 

New Accounting Pronouncements

     In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in the Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for our first quarter in fiscal 2017, pending a one year deferral currently under consideration by the FASB, under either full or modified retrospective adoption. Early application is not permitted. We are currently assessing the potential effects of these changes to our consolidated financial statements. On July 9, 2015, the FASB voted to approve a one year deferral of the ASU which would make it effective for annual periods beginning after December 15, 2017, and interim periods within those years.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” (Topic 250). The ASU provides guidance on management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and in certain circumstances to provide related footnote disclosures. The ASU is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statements - Extraordinary and Unusual Items” (Sub-Topic 225-20), which eliminates from U.S. GAAP the concept of extraordinary items. The ASU eliminates the separate presentation of extraordinary items on the income statement, net of tax and the related earnings per share, but does not affect the requirement to disclose material items that are unusual in nature or occurring infrequently. The ASU is effective for the annual period beginning after December 15, 2015 and interim periods within those annual periods, with early adoption permitted, and may be applied prospectively or retrospectively. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The ASU requires entities that have historically presented debt issuance costs as an asset to present those costs as a direct deduction from the carrying amount of the related debt liability. This presentation will result in the debt issuance costs being presented the same way debt discounts have historically been handled. The ASU does not change the recognition, measurement, or subsequent measurement guidance for debt issuance costs. The ASU is effective for the annual period beginning after December 15, 2015 and interim periods within those annual periods and is to be applied retrospectively. Early adoption is permitted. We plan to adopt this change retrospectively, and do not expect the adoption of this standard to have a material impact on our consolidated financial statements.


10



NOTE B – ACQUISITION

Acquisition of Compressor Systems, Inc.

On August 4, 2014, pursuant to a stock purchase agreement dated July 20, 2014, one of our subsidiaries acquired all of the outstanding capital stock of CSI for $825.0 million cash (the "CSI Acquisition"). Prior to the acquisition, CSI owned one of the largest fleets of natural gas compressor packages in the United States. Headquartered in Midland, Texas, CSI fabricates, sells, and maintains natural gas compressors and provides a full range of compression products and services that covers compression needs throughout the entire natural gas production and transportation cycle to natural gas and oil producing clients. CSI derives revenues through three primary business lines: compression and related services, equipment and parts sales, and aftermarket services. Strategically, the acquisition affords us the opportunity to capture significant synergies associated with our product and service offerings and our fabrication operations, further penetrate new and existing markets, and to achieve administrative efficiencies and other strategic benefits.

Our allocation of the purchase price to the estimated fair value of the CSI net assets is as follows (in thousands):
Current assets
$
101,411

Property and equipment
571,706

Intangible assets
68,000

Goodwill
161,387

Total assets acquired
902,504


 
Current liabilities
77,504

Total liabilities assumed
77,504

Net assets acquired
$
825,000

The allocation of purchase price includes approximately $161.4 million allocated to deductible goodwill recorded, and is supported by the strategic benefits discussed above that are expected to be generated from the acquisition. Adjustments to the allocation of purchase price affecting inventory, property, plant, and equipment, intangible assets, and other current assets and liabilities have been reflected in the accompanying consolidated balance sheets as of June 30, 2015 and December 31, 2014. The adjustment to the previously presented goodwill balance as of December 31, 2014 was $0.1 million. These adjustments to the allocation of purchase price for long-lived assets did not have a material impact on the depreciation and amortization of these assets. The acquired property, plant, and equipment is stated at fair value, and depreciation on the acquired property, plant, and equipment is computed using the straight-line method over the estimated useful lives of each asset. Buildings are depreciated using useful lives of 15 to 30 years. Machinery and equipment is depreciated using useful lives of 2 to 16 years. Automobiles and trucks are depreciated using useful lives of 3 to 4 years. The acquired intangible assets represents approximately $33.7 million for trademarks/trade names, approximately $21.4 million for customer relationships, and approximately $12.9 million for other intangible assets that are stated at estimated fair value and are amortized on a straight-line basis over their estimated useful lives, which range from 2 to 15 years. These intangible assets are recorded net of approximately $9.7 million of accumulated amortization as of June 30, 2015.

For the three month period ended June 30, 2015, our revenues, depreciation and amortization, and pretax earnings, excluding $8.0 million of allocated interest and administrative expense, included $96.3 million, $16.5 million, and $6.7 million, respectively, associated with the CSI Acquisition. For the six month period ended June 30, 2015, our revenues, depreciation and amortization, and pretax earnings, excluding $15.8 million of allocated interest and administrative expense, included $167.5 million, $32.4 million, and $13.6 million, respectively, associated with the CSI Acquisition. Approximately $16.6 million of deferred financing costs were incurred in connection with the acquisition and included in Other Assets as of the acquisition date, and will be amortized over the term of the related debt. An additional $6.7 million of interim financing costs related to the acquisition were incurred and reflected in other expense during the year ended December 31, 2014.

11




Pro Forma Financial Information

The pro forma information presented below has been prepared to give effect to the CSI Acquisition as if it had occurred at the beginning of the period presented and includes the impact of the allocation of the purchase price for the CSI Acquisition on revenues, depreciation and amortization, and net income. The pro forma information is presented for illustrative purposes only and is based on estimates and assumptions we deemed appropriate. The pro forma information is not necessarily indicative of the historical results that would have been achieved if the acquisition had occurred in the past, and our operating results may have been different from those reflected in the pro forma information below. Therefore, the pro forma information should not be relied upon as an indication of the operating results that we would have achieved if the transaction had occurred at the beginning of the period presented or the future results that we will achieve after the transaction.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2014
 
(In Thousands, Except Per Unit Amounts)
 
 
 
 
Revenues
$
109,426

 
$
232,267

Depreciation and amortization
18,636

 
37,002

Net income
1,939

 
5,835

 
 
 
 
Per share information:
 
 
 
Net income per common unit:
 
 
 
Basic
$
0.06

 
$
0.17

Diluted
$
0.06

 
$
0.17

 
 
 
 
Net income per subordinated unit:
 
 
 
Basic and diluted
$
0.06

 
$
0.17


NOTE C LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt consists of the following:
 
 
 
 
June 30, 2015
 
December 31, 2014
 
 
Scheduled Maturity
 
(In Thousands)
Credit Agreement
 
August 4, 2019
 
$
233,000

 
$
195,000

7.25% Senior Notes (presented net of the unamortized discount of $4.8 million as of June 30, 2015 and $5.0 million as of December 31, 2014)
 
August 15, 2022
 
345,212

 
344,961

 
 
 
 
578,212

 
539,961

Less current portion
 
 
 

 

Total long-term debt
 
 
 
$
578,212

 
$
539,961


We are in compliance with all covenants and conditions of our debt agreements as of June 30, 2015.


12



NOTE D – MARKET RISKS AND DERIVATIVE CONTRACTS
 
We are exposed to financial and market risks that affect our business. We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. As a result of our variable rate bank credit facility, we face market risk exposure related to changes in applicable interest rates. We have concentrations of credit risk as a result of trade receivables owed to us by companies in the energy industry. Our financial risk management activities may at times involve, among other measures, the use of derivative financial instruments, such as swap and collar agreements, to hedge the impact of market price risk exposures. We formally document our risk management objectives and our strategies for undertaking various derivative transactions.

Foreign Currency Derivative Contracts
 
As of June 30, 2015, we had the following foreign currency derivative contracts outstanding relating to a portion of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward sale Canadian dollar
 
$
780

 
1.25
 
7/17/2015
Forward sale Mexican peso
 
$
2,066

 
15.71
 
7/17/2015

Under a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries, we may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they will not be formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period.

The fair values of our foreign currency derivative instruments are based on quoted market values as reported to us by our counterparty (a level 2 fair value measurement). The fair values of our foreign currency derivative instruments as of June 30, 2015 and December 31, 2014, are as follows:
Foreign currency derivative instruments
 
Balance Sheet
 
Fair Value at
 
Location
 
June 30, 2015
 
December 31, 2014
 
 
 
 
(In Thousands)
Forward sale contracts
 
Current assets
 
$
44

 
$

Net asset
 
 
 
$
44

 
$


None of the foreign currency derivative contracts contains credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and six month periods ended June 30, 2015, we recognized approximately $0.0 million and $0.2 million, respectively, of net gains associated with our foreign currency derivative program, and such amount is included in other expense, net, in the accompanying consolidated statement of operations.

NOTE E – RELATED PARTY TRANSACTIONS
 
Set forth below is a description of one of the agreements we entered into with related parties.
 
Omnibus Agreement
 
On June 20, 2014, CSI Compressco LP (the "Partnership"), CSI Compressco GP Inc. (the "General Partner") and TETRA Technologies, Inc. ("TETRA") entered into a First Amendment to Omnibus Agreement (the "First Amendment"). The First Amendment amended the Omnibus Agreement previously entered into on June 20, 2011 (as amended, the "Omnibus Agreement") to extend the term thereof. The Omnibus Agreement will terminate on the earlier of (i) a change of control of the General Partner or TETRA, or (ii) upon any party providing at least 180 days' prior written notice of termination.

13



 
Under the terms of the Omnibus Agreement, our General Partner provides all personnel and services reasonably necessary to manage our operations and conduct our business (other than in Mexico, Canada, and Argentina), and certain of TETRA’s Latin American-based subsidiaries provide personnel and services necessary for the conduct of certain of our Latin American-based businesses. In addition, under the Omnibus Agreement, TETRA provides certain corporate and general and administrative services as requested by our General Partner, including, without limitation, legal, accounting and financial reporting, treasury, insurance administration, claims processing and risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, and tax services. Pursuant to the Omnibus Agreement, we reimburse our General Partner and TETRA for services they provide to us.

Under the terms of the Omnibus Agreement, we or TETRA may, but neither of us are under any obligation to, perform for the other such production enhancement or other oilfield services on a subcontract basis as are needed or desired by the other, for such periods of time and in such amounts as may be mutually agreed upon by TETRA and our General Partner. Any such services are required to be performed on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner.
 
Under the terms of the Omnibus Agreement, we or TETRA may, but neither of us are under any obligation to, sell, lease or exchange on a like-kind basis to the other such production enhancement or other oilfield services equipment as is needed or desired to meet either of our production enhancement or other oilfield services obligations, in such amounts, upon such conditions and for such periods of time, if applicable, as may be mutually agreed upon by TETRA and our General Partner. Any such sales, leases, or like-kind exchanges are required to be on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner. In addition, unless otherwise approved by the conflicts committee of our General Partner’s board of directors, TETRA may purchase newly fabricated equipment from us at a negotiated price, provided that such price may not be less than the sum of the total costs (other than any allocations of general and administrative expenses) incurred by us in fabricating such equipment plus a fixed margin percentage thereof, and TETRA may purchase from us previously fabricated equipment for a price that is not less than the sum of the net book value of such equipment plus a fixed margin percentage thereof.

This description is not a complete discussion of this agreement and is qualified in its entirety by reference to the full text of the complete agreement, which is filed, along with other agreements, as exhibits to our filings with the SEC.

TETRA and General Partner Ownership

To finance a portion of the $825.0 million CSI Acquisition purchase price, we issued and sold 15,280,000 additional common units for net proceeds of $346.0 million (the "Common Unit Offering"). TETRA, through a subsidiary of our General Partner, purchased 1,390,290 of these common units for approximately $32.7 million. In addition, in connection with our Common Unit Offering, our General Partner made a $7.3 million capital contribution to us in order to maintain its approximate 2% general partnership interest in us. Following the August 11, 2014, exercise by the underwriters in the Common Unit Offering of their option to purchase 2,292,000 additional common units, our General Partner made an additional $1.1 million capital contribution in order to maintain its approximate 2% general partnership interest in us.

Prior to the Common Unit Offering and other transactions described above, TETRA's ownership in us was approximately 82% through its aggregate ownership of common units, subordinated units, and indirect general partner interest. Common units held by the public represented an approximately 18% ownership in us prior to the above transactions. However, following the CSI Acquisition, the completion of our Common Unit Offering, and the underwriters' exercise of their option to purchase additional common units, TETRA's ownership interest in us was reduced to approximately 44%, with the common units held by the public representing an approximate 56% interest in us. TETRA's ownership is through various wholly owned subsidiaries and consists of approximately 42% of the

14



limited partner interests plus the approximately 2% general partner interest, through which it holds incentive distribution rights.

NOTE F – INCOME TAXES
 
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. We have a tax sharing agreement with TETRA with respect to the Texas franchise tax liability. The resulting state tax expense is included in the provision for income taxes. Certain of our operations are located outside of the U.S., and the Partnership, through its foreign subsidiaries, is responsible for income taxes in these countries.

In connection with the CSI Acquisition, we and the seller of CSI made a joint Section 338(h) (10) election under the U.S. Internal Revenue Code to treat the purchase of CSI as an asset acquisition for U.S. federal income tax purposes. Accordingly, no U.S. federal deferred tax assets or liabilities were recorded as part of the acquisition.
 
NOTE G – COMMITMENTS AND CONTINGENCIES
 
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of any lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows. 

NOTE H – SEGMENTS

ASC 280-10-50, “Operating Segments”, defines the characteristics of an operating segment as (i) being engaged in business activity from which it may earn revenues and incur expenses, (ii) being reviewed by the company's chief operating decision maker ("CODM") to make decisions about resources to be allocated and to assess its performance, and (iii) having discrete financial information. Although management of our General Partner reviews our products and services to analyze the nature of our revenue, other financial information, such as certain costs and expenses, net income, and EBITDA, are not captured or analyzed by these items. Therefore discrete financial information is not available by product line and our CODM does not make resource allocation decisions or assess the performance of the business based on these items, but rather in the aggregate. Based on this, our General Partner believes that we operate in one business segment. 

NOTE I — SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
    
The $350 million in aggregate principal amount of 7.25% Senior Notes (the "7.25% Senior Notes") are fully and unconditionally guaranteed, subject to certain customary release provisions, on a joint and several senior unsecured basis, by the following domestic restricted subsidiaries (each a "Guarantor Subsidiary" and collectively the "Guarantor Subsidiaries"):

Compressor Systems, Inc.
CSI Compressco Field Services International LLC
CSI Compressco Holdings LLC
CSI Compressco International LLC
CSI Compressco Leasing LLC
CSI Compressco Operating LLC
CSI Compressco Sub, Inc.
CSI Compression Holdings, LLC
Pump Systems International, Inc.
Rotary Compressor Systems, Inc.

As a result of these guarantees, we are presenting the following condensed consolidating financial information pursuant to Rule 3-10 of Regulation S-X. These schedules are presented using the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and

15



adjusted for our share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions. The Other Subsidiaries column includes financial information for those subsidiaries that do not guarantee the 7.25% Senior Notes. Financial information of the Issuers includes CSI Compressco Finance Inc., which had no assets or operations for any of the periods presented.


Condensed Consolidating Balance Sheet
June 30, 2015
(In Thousands)
 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
254

 
$
180,639

 
$
27,596

 
$

 
$
208,489

Property, plant, and equipment, net
 

 
681,936

 
23,635

 

 
705,571

Investments in subsidiaries
 
544,784

 
16,510

 

 
(561,294
)
 

Intangible and other assets, net
 
9,014

 
298,568

 
1,757

 

 
309,339

Intercompany receivables
 
321,968

 

 

 
(321,968
)
 

Total non-current assets
 
875,766

 
997,014

 
25,392

 
(883,262
)
 
1,014,910

Total assets
 
$
876,020

 
$
1,177,653

 
$
52,988

 
$
(883,262
)
 
$
1,223,399

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS' CAPITAL
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
11,699

 
$
100,690

 
$
5,031

 
$

 
$
117,420

Amounts payable to affiliates
 
45

 
2,954

 
4,352

 

 
7,351

Long-term debt
 
345,212

 
233,000

 

 

 
578,212

Intercompany payables
 

 
295,800

 
26,168

 
(321,968
)
 

Other long-term liabilities
 

 
425

 
927

 

 
1,352

Total liabilities
 
356,956

 
632,869

 
36,478

 
(321,968
)
 
704,335

Total partners' capital
 
519,064

 
544,784

 
16,510

 
(561,294
)
 
519,064

Total liabilities and partners' capital
 
$
876,020

 
$
1,177,653

 
$
52,988

 
$
(883,262
)
 
$
1,223,399



16



Condensed Consolidating Balance Sheet
December 31, 2014
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
28

 
$
197,485

 
$
34,277

 
$

 
$
231,790

Property, plant, and equipment, net
 

 
669,145

 
16,851

 

 
685,996

Investments in subsidiaries
 
562,290

 
17,303

 

 
(579,593
)
 

Intangible and other assets, net
 
9,650

 
303,252

 
1,773

 

 
314,675

Intercompany receivables
 
335,151

 

 

 
(335,151
)
 

Total non-current assets
 
907,091

 
989,700

 
18,624

 
(914,744
)
 
1,000,671

Total assets
 
$
907,119

 
$
1,187,185

 
$
52,901

 
$
(914,744
)
 
$
1,232,461

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS' CAPITAL
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
11,634

 
$
116,577

 
$
5,677

 
$

 
$
133,888

Amounts payable to affiliates
 
44

 
987

 
5,449

 

 
6,480

Long-term debt
 
344,961

 
195,000

 

 

 
539,961

Intercompany payables
 

 
311,389

 
23,762

 
(335,151
)
 

Other long-term liabilities
 
199

 
942

 
710

 

 
1,851

Total liabilities
 
356,838

 
624,895

 
35,598

 
(335,151
)
 
682,180

Total partners' capital
 
550,281

 
562,290

 
17,303

 
(579,593
)
 
550,281

Total liabilities and partners' capital
 
$
907,119

 
$
1,187,185

 
$
52,901

 
$
(914,744
)
 
$
1,232,461



17



Condensed Consolidating Statement of Operations
and Comprehensive Income
Three Months Ended June 30, 2015
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Revenues
 
$

 
$
117,667

 
$
11,729

 
$
(2,931
)
 
$
126,465

Cost of revenues (excluding depreciation and amortization expense)
 

 
78,678

 
8,938

 
(2,931
)
 
84,685

Selling, general and administrative expense
 
877

 
9,212

 
465

 

 
10,554

Depreciation and amortization
 

 
19,841

 
788

 

 
20,629

Interest expense, net
 
6,472

 
1,489

 

 

 
7,961

Other expense, net
 
318

 
442

 
410

 

 
1,170

Equity in net income of subsidiaries
 
(8,830
)
 
(821
)
 

 
9,651

 

Income before income tax provision
 
1,163

 
8,826

 
1,128

 
(9,651
)
 
1,466

Provision (benefit) for income taxes
 

 
(4
)
 
307

 

 
303

Net income
 
1,163

 
8,830

 
821

 
(9,651
)
 
1,163

Other comprehensive income (loss)
 
(1,853
)
 
(1,853
)
 
(1,853
)
 
3,706

 
(1,853
)
Comprehensive income (loss)
 
$
(690
)
 
$
6,977

 
$
(1,032
)
 
$
(5,945
)
 
$
(690
)


18



Condensed Consolidating Statement of Operations
and Comprehensive Income
Three Months Ended June 30, 2014
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Revenues
 
$

 
$
23,671

 
$
11,096

 
$
(2,659
)
 
$
32,108

Cost of revenues (excluding depreciation and amortization expense)
 

 
10,670

 
9,282

 
(2,659
)
 
17,293

Selling, general and administrative expense
 
235

 
4,012

 
761

 

 
5,008

Depreciation and amortization
 

 
3,448

 
303

 

 
3,751

Interest expense, net
 

 
148

 
(3
)
 

 
145

Other expense, net
 

 
422

 
76

 

 
498

Equity in net income of subsidiaries
 
(5,114
)
 
(1,037
)
 

 
6,151

 

Income before income tax provision
 
4,879

 
6,008

 
677

 
(6,151
)
 
5,413

Provision (benefit) for income taxes
 

 
894

 
(360
)
 

 
534

Net income
 
4,879

 
5,114

 
1,037

 
(6,151
)
 
4,879

Other comprehensive income (loss)
 
77

 
77

 
77

 
(154
)
 
77

Comprehensive income
 
$
4,956

 
$
5,191

 
$
1,114

 
$
(6,305
)
 
$
4,956



19



Condensed Consolidating Statement of Operations
and Comprehensive Income
Six Months Ended June 30, 2015
(In Thousands)


 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Revenues
 
$

 
$
220,688

 
$
22,397

 
$
(13,731
)
 
$
229,354

Cost of revenues (excluding depreciation and amortization expense)
 

 
141,592

 
16,931

 
(13,731
)
 
144,792

Selling, general and administrative expense
 
1,354

 
19,454

 
995

 

 
21,803

Depreciation and amortization
 

 
38,461

 
2,156

 

 
40,617

Interest expense, net
 
12,941

 
2,926

 

 

 
15,867

Other expense, net
 
619

 
861

 
929

 

 
2,409

Equity in net income of subsidiaries
 
(17,885
)
 
(885
)
 

 
18,770

 

Income before income tax provision
 
2,971

 
18,279

 
1,386

 
(18,770
)
 
3,866

Provision for income taxes
 

 
394

 
501

 

 
895

Net income
 
2,971

 
17,885

 
885

 
(18,770
)
 
2,971

Other comprehensive income (loss)
 
(1,677
)
 
(1,677
)
 
(1,677
)
 
3,354

 
(1,677
)
Comprehensive income (loss)
 
$
1,294

 
$
16,208

 
$
(792
)
 
$
(15,416
)
 
$
1,294



20



Condensed Consolidating Statement of Operations
and Comprehensive Income
Six Months Ended June 30, 2014
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Revenues
 
$

 
$
46,882

 
$
20,306

 
$
(5,270
)
 
$
61,918

Cost of revenues (excluding depreciation and amortization expense)
 

 
21,604

 
17,042

 
(5,270
)
 
33,376

Selling, general and administrative expense
 
437

 
6,948

 
1,717

 

 
9,102

Depreciation and amortization
 

 
6,839

 
594

 

 
7,433

Interest expense, net
 

 
332

 
(28
)
 

 
304

Other expense, net
 

 
125

 
912

 

 
1,037

Equity in net income of subsidiaries
 
(9,935
)
 
(353
)
 

 
10,288

 

Income before income tax provision
 
9,498

 
11,387

 
69

 
(10,288
)
 
10,666

Provision (benefit) for income taxes
 

 
1,452

 
(284
)
 

 
1,168

Net income
 
9,498

 
9,935

 
353

 
(10,288
)
 
9,498

Other comprehensive income (loss)
 
(2,891
)
 
(2,891
)
 
(2,891
)
 
5,782

 
(2,891
)
Comprehensive income (loss)
 
$
6,607

 
$
7,044

 
$
(2,538
)
 
$
(4,506
)
 
$
6,607



21



Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2015
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Net cash provided by (used in) operating activities
 
$

 
$
42,771

 
$
9,431

 
$

 
$
52,202

Investing activities:
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant, and equipment, net
 

 
(46,638
)
 
(10,454
)
 

 
(57,092
)
Intercompany investment activity
 
33,715

 

 
 
 
(33,715
)
 

Advances and other investing activities
 
 
 
(64
)
 

 
 
 
(64
)
Net cash provided by (used in) investing activities
 
33,715

 
(46,702
)
 
(10,454
)
 
(33,715
)
 
(57,156
)
Financing activities:
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
 

 
38,153

 

 

 
38,153

Distributions
 
(33,715
)
 

 

 

 
(33,715
)
Intercompany contribution (distribution)
 

 
(33,715
)
 

 
33,715

 

Net cash provided by (used in) financing activities
 
(33,715
)
 
4,438

 

 
33,715

 
4,438

Effect of exchange rate changes on cash
 

 

 
(271
)
 

 
(271
)
Increase (decrease) in cash and cash equivalents
 

 
507

 
(1,294
)
 

 
(787
)
Cash and cash equivalents at beginning of period
 

 
23,343

 
10,723

 

 
34,066

Cash and cash equivalents at end of period
 
$

 
$
23,850

 
$
9,429

 
$

 
$
33,279



22



Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2014
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Net cash provided by (used in) operating activities
 
$

 
$
18,484

 
$
2,472

 
$

 
$
20,956

Investing activities:
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant, and equipment, net
 

 
(9,708
)
 
(1,174
)
 

 
(10,882
)
Intercompany investment activity
 
14,258

 

 
 
 
(14,258
)
 

Advances and other investing activities
 

 
(1,405
)
 

 

 
(1,405
)
Net cash provided by (used in) investing activities
 
14,258

 
(11,113
)
 
(1,174
)
 
(14,258
)
 
(12,287
)
Financing activities:
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
 

 
7,348

 

 

 
7,348

Distributions
 
(14,258
)
 

 

 

 
(14,258
)
Intercompany contribution (distribution)
 

 
(14,258
)
 

 
14,258

 

Net cash provided by (used in) financing activities
 
(14,258
)
 
(6,910
)
 

 
14,258

 
(6,910
)
Effect of exchange rate changes on cash
 

 

 
(396
)
 

 
(396
)
Increase (decrease) in cash and cash equivalents
 

 
461

 
902

 

 
1,363

Cash and cash equivalents at beginning of period
 

 
4,339

 
5,138

 

 
9,477

Cash and cash equivalents at end of period
 
$

 
$
4,800

 
$
6,040

 
$

 
$
10,840


NOTE J – SUBSEQUENT EVENTS

On July 20, 2015, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended June 30, 2015 of $0.50 per unit. This distribution equates to a distribution of $2.00 per outstanding unit, on an annualized basis. This cash distribution is to be paid on August 14, 2015 to all unitholders of record as of the close of business on July 31, 2015.


23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K filed with the SEC on March 19, 2015. This discussion includes forward-looking statements that involve certain risks and uncertainties.
 
Business Overview

The CSI Acquisition, which closed on August 4, 2014, significantly impacted our revenues, results of operations, and operating cash flow during the three month period ended June 30, 2015 compared to the corresponding prior year period. Revenues generated by CSI during the second quarter of 2015 totaled approximately $96.3 million, increasing consolidated revenues for the second quarter of 2015 to $126.5 million, compared to $32.1 million during the second quarter of 2014. CSI revenues during the second quarter of 2015 included approximately $43.3 million of compression and $4.7 million of aftermarket services revenues, primarily in the U.S., and approximately $48.3 million of equipment and parts sales revenues. Due to decreased oil and natural gas prices during the current year period compared to the corresponding prior year period, there has been a reduction in demand for production enhancement compression services, including in liquids-rich resource plays and vapor recovery applications. Despite this decreased demand, our pre-CSI Acquisition compression service revenues remained relatively consistent during the three month period ended June 30, 2015 compared to the corresponding prior year period, decreasing by approximately $0.5 million. We expect that oil and gas exploration activity levels will continue to be decreased during the remainder of 2015 compared to 2014, while most ongoing customer projects supporting gas gathering, midstream, and processing will proceed to completion. Much of our current equipment sales fabrication backlog is associated with such customer projects. Our equipment sales fabrication backlog decreased as of June 30, 2015 compared to December 31, 2014, as completed equipment sales during the first half of 2015 exceeded new equipment sales orders. However, the level of sales orders and completed sales both increased during the second quarter of 2015 compared to the first quarter of 2015. Although our compressor fleet horsepower utilization rate has decreased as of the end of each of the past two quarters, we feel the diversity of our compressor package fleet and the existing levels of natural gas production will continue to support the demand for our compressor packages and services, despite current prices for oil and natural gas.
Including the increased horsepower (HP) added from the CSI Acquisition, our total HP offering has increased from approximately 187,000 prior to the acquisition to over 1,139,000 as of June 30, 2015, and this increase allows us to utilize a wide range of compressor packages (from 20 HP to 2,370 HP) to provide compression services to customers. The CSI Acquisition dramatically expanded our service and equipment sales offerings in the over-100 HP compression services market, complementing our existing strong presence in the below-100 HP compression services market. Strategically, the acquisition afforded us the opportunity to capture significant synergies associated with our service and product offerings and our fabrication operations, to further expand into new and existing markets, and to achieve administrative efficiencies and other strategic benefits.
The continued growth of our operations is particularly dependent upon our continued capital expenditure program. Capital expenditures during the first six months of 2015 totaled $57.1 million and we anticipate that our total capital expenditures during all of 2015 will be approximately $105 million, including approximately $14 million of maintenance capital expenditures. We plan to fund this continuing investment through our Credit Agreement, undistributed operating cash flows, and potentially other sources, if necessary.

How We Evaluate Our Operations
 
Operating Expenses. We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, year-to-date, and year-to-year comparisons and as compared to budget. This analysis is useful in identifying adverse cost trends and allows us to investigate the cause of these trends and implement remedial measures, if possible. The most significant portions of our operating expenses are for our field labor, repair and maintenance of our equipment, and for the fuel and other supplies consumed while providing our services. Other materials consumed while performing our services, ad valorem taxes, other labor costs, truck maintenance, rent on storage facilities, and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with our level of activity.


24



Our labor costs consist primarily of wages and benefits for our field and fabrication personnel, as well as expenses related to their training and safety. Additional information regarding our operating expenses for the three month period ended June 30, 2015, is provided within the Results of Operations sections below.
 
EBITDA. We view EBITDA as one of our primary management tools and we track it on a monthly basis, both in dollars and as a percentage of revenues (compared to the prior month, prior year period, and to budget). We define EBITDA as earnings before interest, taxes, depreciation, and amortization. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to:
assess our ability to generate available cash sufficient to make distributions to our unitholders and General Partner;
evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
measure operating performance and return on capital as compared to our competitors; and
determine our ability to incur and service debt and fund capital expenditures.
 
EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities, or any other measure of financial performance presented in accordance with generally accepted accounting principles ("GAAP"). Our EBITDA may not be comparable to EBITDA or similarly titled financial metrics of other entities, as other entities may not calculate EBITDA in the same manner as we do. Management compensates for the limitations of EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes. EBITDA should not be viewed as indicative of the actual amount we have available for distributions or that we plan to distribute for a given period, nor should it be equated with “available cash” as defined in our partnership agreement.
 
The following table reconciles net income to EBITDA for the periods indicated:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Net income
$
1,163

 
$
4,879

 
$
2,971

 
$
9,498

Provision for income taxes
303

 
534

 
895

 
1,168

Depreciation and amortization
20,629

 
3,751

 
40,617

 
7,433

Interest expense, net
7,961

 
145

 
15,867

 
304

EBITDA
$
30,056


$
9,309

 
$
60,350

 
$
18,403

 
The following table reconciles cash flow from operating activities to EBITDA:
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
(In Thousands)
Cash flow from operating activities
$
52,202

 
$
20,956

Changes in current assets and current liabilities
(6,139
)
 
(3,098
)
Deferred income taxes
433

 
141

Other non-cash charges
(2,908
)
 
(1,068
)
Interest expense, net
15,867

 
304

Provision for income taxes
895

 
1,168

EBITDA
$
60,350

 
$
18,403


The CSI Acquisition has had, and is expected to continue to have, a significant impact on EBITDA going forward.

25



Horsepower Utilization Rate of our Compressor Packages. We measure the horsepower utilization rate of our fleet of compressor packages as the amount of horsepower of compressor packages used to provide services as of a particular date, divided by the amount of horsepower of compressor packages in our fleet as of such date. Management primarily uses this metric to determine our future need for additional compressor packages and to measure marketing effectiveness.
 
The following table sets forth our total horsepower in our fleet and our total horsepower in service as of the dates shown.
 
June 30,
 
2015
 
2014
Horsepower
 
 
 
Total horsepower in fleet
1,138,656

 
187,513

Total horsepower in service
952,442

 
162,453

Net Increases in Compression Fleet Horsepower. We measure the net increase in our compression fleet horsepower during a given period of time by taking the difference between the aggregate horsepower of compressor packages added to the fleet during the period, less the aggregate horsepower of compressor packages removed from the fleet during the period. We measure the net increase in our compression fleet horsepower in service during a given period of time by taking the difference between the aggregate horsepower of compressor packages placed into service during the period, less the aggregate horsepower of compressor packages removed from service during the period. Management uses these metrics to evaluate our operating performance and our relative size in the market.
Manufacturing and Backlog. Our equipment and parts sales business includes the fabrication and sale of standard compressor packages, custom-designed compressor packages, and oilfield fluid pump systems designed and fabricated primarily at our facilities in Midland, Texas and Oklahoma City, Oklahoma. The equipment is fabricated to applicable customer and standard specifications. Our custom fabrication projects are typically greater in size and scope than standard fabrication projects, requiring more labor, materials, and overhead resources. Our fabrication business requires diligent planning of those resources and project and backlog management in order to meet the customer delivery dates and performance criteria. As of June 30, 2015, our fabrication backlog was approximately $86.9 million, of which approximately $67.1 million is expected to be recognized through the year ended December 31, 2015, based on title passing to the customer, the customer assuming the risks of ownership, reasonable assurance of collectability, and delivery occurring as directed by our customer. Our fabrication backlog consists of firm customer orders for which a purchase or work order has been received, satisfactory credit or financing arrangements exists, and delivery has been scheduled. Our fabrication backlog is a measure of marketing effectiveness that allows us to plan future labor needs and measure our success in winning bids from our customers.

Critical Accounting Policies
 
There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our Form 10-K for the year ended December 31, 2014, except as described below. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We periodically evaluate these estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the useful life of long-lived assets, the collectability of accounts receivable, and the allocation of acquisition purchase price. Our estimates are based on historical experience and on future expectations that we believe are reasonable. The fair values of a large portion of our total assets and liabilities are measured using significant unobservable inputs. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.


26



Impairment of Goodwill
 
Goodwill represents the excess of cost over the fair value of the net assets of businesses acquired in purchase transactions. We perform a goodwill impairment test on an annual basis or whenever indicators of impairment are present. We perform the annual test of goodwill impairment following the fourth quarter of each year, and determined that no impairment of goodwill was required as of December 31, 2014. Our annual assessment for goodwill impairment begins with a qualitative assessment of whether it is “more likely than not” that the fair value of our business is less than its carrying value. This qualitative assessment requires the evaluation, based on the weight of evidence, of the significance of all identified events and circumstances. Based on this qualitative assessment, we determined that due to the decrease in the market price of our common units that resulted in our market capitalization being less than the book value of our consolidated partners' capital as of December 31, 2014, it was “more likely than not” that the fair value of our business was less than its carrying value as of December 31, 2014.

When the qualitative analysis indicates that it is “more likely than not” that our business’ fair value is less than its carrying value, the resulting goodwill impairment test consists of a two-step accounting test being performed. The first step of the impairment test is to compare the estimated fair value with the recorded net book value (including goodwill) of our business. If the estimated fair value is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition. Purchase business combination accounting rules are followed to determine a hypothetical purchase price allocation to assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill, and the recorded amount is written down to the hypothetical amount, if lower. Our estimates of our fair value, if required, are based on a combination of an income approach and a market approach. These estimates are imprecise and subject to our estimates of the future cash flows of our business and our judgment as to how these estimated cash flows translate into our business’ estimated fair value. These estimates and judgments are affected by numerous factors, including the general economic environment at the time of our assessment, which affects our overall market capitalization. If we overestimate the fair value of our business, the balance of our goodwill asset may be overstated. Alternatively, if our estimated fair values are understated, an impairment might be recognized unnecessarily or in excess of the appropriate amount.

During the first half of 2015, global oil and natural gas commodity prices, particularly crude oil, were significantly decreased compared to early 2014. This decrease in commodity prices has had, and is expected to continue to have, a negative impact on industry drilling and capital expenditure activity, which affects the demand for a portion of our products and services. The accompanying decrease in the price of our common units during the last half of 2014 caused an overall reduction in our market capitalization. Although the price of our common units increased as of June 30, 2015 compared to December 31, 2014, and our market capitalization exceeds our recorded net book value, uncertain market conditions resulting from current oil and natural gas prices continue. We have updated our internal business outlook to consider the current global economic environment that affects our operations. As part of the first step of goodwill impairment testing, we updated our assessment of our future cash flows, applying expected long-term growth rates, discount rates, and terminal values that we consider reasonable. We have calculated a present value of the cash flows to arrive at an estimate of fair value under the income approach, and then used the market approach to corroborate this value. As a result of these estimates, we determined that there was no impairment of goodwill as of December 31, 2014 or June 30, 2015. However, because our estimated fair value exceeded our carrying value by approximately 10%, there is a reasonable possibility that the $233.4 million of goodwill may be impaired in a future period resulting in a non-cash charge to earnings, and the amount of such impairment may be material. Specific uncertainties affecting our estimated fair value include the impact of competition, the prices of oil and natural gas, future overall activity levels in the regions in which we operate, the activity levels of our significant customers, and other factors affecting the rate of our future growth. These factors will continue to be reviewed and assessed going forward. Adverse developments with regard to these factors could have a further negative effect on our fair value.


27



Results of Operations

Results of operations for the three months ended June 30, 2015, reflect the impact of the CSI Acquisition acquired in August 2014.

Three months ended June 30, 2015 compared to three months ended June 30, 2014
 
Three Months Ended June 30,
 
 
 
 
 
Period-to-Period Change
 
Percentage of Total Revenues
 
Period-to-Period Change
Consolidated Results of Operations
2015
 
2014
 
2015 vs. 2014
 
2015
 
2014
 
2015 vs. 2014
 
(In Thousands)
 
 
 
 
 
 
Revenues:
 

 
 

 
 
 
 
 
 
 
 
Compression and related services
72,826

 
30,043

 
$
42,783

 
57.6
%
 
93.6
%
 
142.4
 %
Aftermarket services
4,671

 

 
$
4,671

 
3.7
%
 
%
 
 %
Equipment and parts sales
48,968

 
2,065

 
46,903

 
38.7
%
 
6.4
%
 
2,271.3
 %
Total revenues
126,465

 
32,108

 
$
94,357

 
100.0
%
 
100.0
%
 
293.9
 %
Cost of revenues:
 
 
 
 
 
 
 

 
 

 
 

Cost of compression and related services
37,490

 
16,227

 
21,263

 
29.6
%
 
50.5
%
 
131.0